Arranging finance for your small business

Having a great business idea or knowing how to make it work is not just enough you need money to begin with anything almost. The most tedious and challenging task that a home entrepreneur faces, at that time of setting up a small business is how to arrange for the finances. If you do not have much of savings or any other personal source of funding your business, you will need to look outside for funding sources. And to help you with arranging funds, for your small business, we have enlisted a few sources from where you can get the required funds.

The small business administration(SBA) loan:

This is a great facility available in the United States of America which has helped several entrepreneurs to start their own small business. The SBA itself is not a lending institution and does not provide loans or grants for setting up a business; the purpose of this association is to provide guarantees on loans that the entrepreneurs take from private lender. In this way the process of getting a loan becomes easier as more lenders are willing to lend the money, which they otherwise wont lend due to the high amount of risk that is there in the new businesses ventures.

The SBA bases its primary consideration on the ability of the business to generate good cash flow along with the entrepreneurs character, capability, equity and the kind of collateral that he is able to offer. You may be required to offer some personal guarantee in the form of personal assets. By using this financing option you are risking your personal asset, which will serve as the collateral. Some of the criteria on which the SBA will determine your business as being eligible for the loan are:

The business must have a profit motive and should not be for the purpose of charity.

The business must be based in the United States.

The owner must have reasonable amount of equity in the business.

The owner must use some alternative financial resources like his personal assets.

The proceeds of the loan cannot to be used to pay for existing debts, floor plans, to make payments to the business owner or to pay for the aberrant taxes.

The money that you obtain from the loan is specifically to be used only for the business purpose like purchasing of property where the business will be conducted, construction of facilities, renovation or improvement of the purchased property, purchase of furniture, machinery and equipment, purchase of stocks and inventory and for working capital.

As for the repayment, the amount of loan taken to be used as working capital must be repaid within a maximum of seven years and the amount taken on the fixed asset must be paid off before the economic life of the assets comes down to zero or 25 years whichever is earlier.

The SBA charges a certain amount of fees from the lender for the guarantee that it offers, and as a buyer of the loan you can expect this fees to be charged from you by the lender. The fees structure is:

For loans which are equal to or less than dollar 150,000, the rate is two percent of the guaranteed amount.

For loans about dollar 150,000 but less than Dollar 700,000 the rate is three percent.

For any amounts above dollar 700,000 the rate is 3.5 percent.

The annual servicing fee is charged at 0.5 percent on the balance loan amount.

The business owners, who meet the eligibility requirements set up by SBA, are entitled to 85 percent of guarantee on the loan amount of dollar 150,000 or less and up to 75 percent on amounts more than that.

Angel investors:

These are investors who would like to make investments in small businesses if they feel that the results will get them good yield on their investment. They will evaluate the kind of risk involved in the business and accordingly decided on the investment plan. They are generally successful business owners and they wish to help new businesses to come up while maximizing their own profits.

The best part of this type of funding is that it makes you eligible to qualify for venture capital in future. The amount of investment that these people will make is between $150,000.00 to one and a half million dollars.

As of today more than 250,000 angel investors are assumed to exist in the United States, and over 30,000 companies are a benefited with angel investors every year. But it may be a difficult task to find an angel investor for your business. You may look for help on this, on the internet where special internet based listing services are there offering information on angel investors.

Venture capital:

Venture capital firms are those which like to invest in different businesses to appreciate their capital rather than simply rest on the interest that can be generated on the funds available with them. They will work only on projects where they expect the returns to be at least five to ten times of the amount invested. They are interested in projects which involve millions of dollars rather than thousands of dollars.

The current trend shows that venture capitalists are keen to invest in internet based businesses more than anything else. But they look forward to a solid business plan an immense growth potential. This kind of business financing is great over the longer term and for the bigger businesses.

The major drawback in this type of funding is that these agencies will have a major control over your business. For the kind of risk that they undertake they usually demand a good control over the running of the business and taking of important decisions.

Giving some amount of control to the venture capitalist is not a bad idea considering that his interests are also targeted towards making your business successful, as his profits depend on it too.

Towards the end we would just like to suggest that you should initially start with your own money and loan programs offered through SBA, and then probably you can move on to angel investors and venture capital when your business starts growing at a faster pace. Remember the old saying that it is best to start slow and easy and then grow big gradually.